They had delayed proceedings hoping it will attract FDI

Banks are likely to initiate recovery proceedings against the crisis-ridden Kingfisher Airlines following the suspension of its flying license by the Directorate General of Civil Aviation (DGCA).

They did not precipitate recovery action against the airline so far as there was a glimmer of hope that the promoter group would get foreign direct investment into the airline and reverse its declining fortunes.

However, with the DGCA suspending its flying license, banks are now left with a Hobson’s Choice (take it or leave it option), said an official with a bank which has lent money to the beleaguered airline.

A consortium of 17 banks, including State Bank of India, IDBI Bank, Bank of Baroda, and Bank of India, have an exposure of about Rs 7,000 crore to Kingfisher Air. SBI has said that it has fully provided for its exposure of about Rs 1,500 crore.

The airline’s management held several parleys with banks in the last one year to get them to loosen their purse strings. However, the banks did not budge.

Banks wanted the airline’s promoter Vijay Mallya to infuse equity and present a credible revival plan before extending a line of credit.

Alarming situation

A banker said: “Until now, we viewed Kingfisher Airlines as a going concern. So, there was some hope that it would be revived. Hence, banks did not initiate recovery action. But with the DGCA suspending its flying license all hopes have been dashed. This is an alarming situation.”

Even if banks initiate recovery proceedings, the collateral at their disposal will not cover even a fraction of their loan exposure to Kingfisher Air, said a concerned official with a public sector bank.

Among others, banks hold shares of United Spirits and Kingfisher Air, which were pledged by the promoter. Then there are immovable properties in the form of Kingfisher House, a villa in Goa, Mallya’s personal guarantee and corporate guarantee given by United Spirits, said the banker.

He observed that due to the suspension of the airline’s flying license, the brand value of Kingfisher Air would get eroded further. Consequently, the value of banks’ shareholding in the airline would also go down substantially.

The airline has been plagued by a number of problems, including cut throat competition from low cost carriers, volatility in the price of aviation turbine fuel, mounting debt, and employees – pilots and engineers – going on strike due to non-payment of salaries.

Last week, S. Vishvanathan, Managing Director, SBI, said that banks’ effort is to recover the maximum from the airline through all possible means .

“There are many methods by which we (banks) recover money. We let the company run and they give us the money back. We wind up the company, sell the assets and get the money back. We sell the company itself, get the money back. We will do whatever is appropriate in the best interest of the group of banks,” he said.

The SBI MD observed that banks are looking at the airline from all aspects to ensure that the money that has been lent to it is recovered as much as possible.

The airline management was supposed to share a revival plan (to resume operations) with banks in the third or fourth week of this month.

ramkumar.k@thehindu.co.in

(This article was published on October 20, 2012)
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